Economic freedom and labour market conditions

Using 1981–2009 data for the 50 states, this article examines the relationship between economic freedom and the unemployment rate, the labor force participation rate, and the employment-population ratio. After controlling for a variety of state-level characteristics, the results from most specifications indicate that economic freedom is associated with lower unemployment and with higher labor force participation and employment-population ratios.

The conclusion to the paper states,

Our findings have clear implications for policymakers. Adopting policies that increase economic freedom by one point in the EFNA index would reduce the unemployment rate by as much as 1.3 percentage points. Likewise a one point increase in economic freedom would increase the labor force participation rate by up to 1.9 percentage points and the employment-population ratio by as much as 2.3 percentage points. Moreover, the estimation results for the EFNA sub-components offer policymakers some guidance about the most beneficial ways to improve state EFNA ratings. The effect of area 1 (size of government) is generally larger than the effect for areas 2 or 3. Hence, our results suggest that reducing the size of government would have the largest effect on labor market outcomes.

So economic freedom does decrease unemployment and increase the labour force participation rate but reducing the size of government is the big winner for reducing unemployment.

1 comment:

I am wondering if that has less to do with government spending and more to do with the level of overall regulation - states with large amounts of government spending also tend to have oppressive regulatory regimes. In other words, correlation does not necessarily imply causation, and simply reducing the size of government may not be enough to reduce unemployment.